Effect of Dividend Franking on Tax Liability

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  IMBI3 on 04/11/2014 - 19:54

  i am not an accountant but yes, i have the same understanding as yours

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  noyesmaybeok on 04/11/2014 - 20:40

  +1

  Not sure how you got $3000 in franking credits given they would have only paid $700 in dividends, of which they paid 30% tax?

  Basically means that your out-of-pocket tax liability is less $700 x 30% because it's been "prepaid". Although of course your income will be $700 more, so if you were in the top tax bracket you'd need to pay more, and if you were less it'd mean you'd get some back/less to pay.

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  GordonR on 04/11/2014 - 20:54

  +3

  Your calculation is incorrect (as pointed out by rochow).

  For 1000 shares, a 70c dividend is 70000c or $700.

  If it is fully franked at 30%, then this means that notionally the company paid you $1000 (which is added to your taxable income), but already paid 30% tax so $300 is deducted from your tax liability.

  So - income up by $1000, then calculate tax liability, then deduct $300 "prepaid".

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    cloudy on 04/11/2014 - 21:02

    Last line of Gordon sums it up.

    So - income up by $1000, then calculate tax liability, then deduct $300 "prepaid". The $300 is refundable if ur liability turns positive (or negative), u know what I mean, it's refundable.

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  cpho on 04/11/2014 - 23:54

  Your calculations are off, so is your conclusion on the tax liability.

  Starting from the top;
  1000 shares, getting $0.70 dividends will yield $700, fully franked.
  Lets ignore your $60k, because the $700 dividends wont change your income bracket.

  So, effect for you:
  Franked distribution $700
  Add franking credit onto your franked distribution $300
  Assessable taxable income of $1000

  In your current bracket, this will be taxed at 32.5%, so $325
  But then, the franking credits are tax deductible, so minus $300
  Finally, you have an income tax payable of only $25.

  In conclusion, your $700 dividend income will have a $25 tax payable effect. (Pre-Medicare)

  • 

    GordonR on 05/11/2014 - 10:37

    +1

    In fact, we could more easily do this calculation, just by noting that the tax payable (or refundable) is just the difference between the investor's marginal tax rate and the company tax rate multiplied by the pre-tax amount.

    So in this case we have

    (32.5 - 30)% x 1000 = 25

    exactly as in your calculation.

    • 

      cpho on 05/11/2014 - 11:26

      Hahah, yeah, that'd be the tl;dr option
      I'm just fleshing it out for OP

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  ukulele on 05/11/2014 - 09:07

  Hey guys thanks. I've always been terrible with orders of magnitude.

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  retiredfeline on 05/11/2014 - 10:50

  Thanks guys I found the info useful too.